Using the HMRC scheme to claim back expenses for your Research and Development (R&D) can help to support and finance future R&D projects and help to further your company’s innovation. Whether you’re creating a new product or developing existing products, when undertaking an R&D project, it’s important to be aware of what costs can and cannot be covered.
This way you can stay on top of your finances and record eligible expenditure ready for your next R&D Tax claim. Below we have listed the 8 categories of R&D expenditure, provided by HMRC, that can be claimed back for tax purposes.
In the HMRC guidelines, the staff costs refer to the payment to employees that directly worked on the R&D project. This can include indirect activities/expenses such as:
By calculating the total annual emolument (the total costs in the above categories) of an employee that worked on the R&D project, you can then multiply this amount by the proportion of their time spent on the project throughout the year. Once you’ve done this for each employee who worked on the project, the last step is to add the figures together and you’ll have your total eligible staff costs.
2.Externally Provided Workers (EPWs)
When beginning new R&D projects, it’s likely you’ll need to source temporary workers from an external agency to provide extra support. These Externally Provided Workers (EPWs) will have their contract with a third-party staff provider/external agency but will work like regular employees for your company.
When applying for a R&D tax incentive, you’ll be eligible to 65% of the payments given to the external agency, regardless of the size of your business. Just like regular employees, the cost of your EPWs will need to be calculated based on how much time they spent working on the R&D project. Additionally, it’s worth noting that if the EPW charges VAT, this cost cannot be counted as part of the tax claim.
Frequently, only SME’s will be allowed to claim tax relief for Subcontracted R&D expenses. According to HMRC, larger companies can only claim for Subcontracted R&D if the project is undertaken by a charity, higher education institute, scientific research organisation, health service body, or an individual/partnership of individuals.
Subcontractors are generally hired when a company outsources a part of their R&D project to another company for a fee. An example of this is if your company hires an external firm to develop a certain activity or work package on your behalf. It can be more profitable to outsource or collaborate with another company that has the relevant technicians and experience to contribute to the R&D project.
As long as the subcontractors are working on behalf of you and your company, their costs would count as eligible expenditure.
You can read more about the HMRC guidance surrounding Sub-Contracted work here.
What is classified as a consumable item? Well, this refers to any materials and resources that have been used or needed for the R&D project/s that have been consumed. This category of expenses includes things like materials, water, light and heat, but does not include things like phones or broadband. All consumable expenses will fit into two separate groupings: apportioned expenses and wholly R&D expenses.
Apportioned expenses refer to their use during and for the R&D project. To find out how much you can claim back, you’ll need to calculate how much each has been spent on R&D activities. Here are some example steps you could follow.
Below is an example that you might find helpful:
There are 6 people in your company. For the project, 3 employees spent 50% of their time on R&D. The other 3 employees spent none of their time on the R&D project.
50% + 50% + 50% = 150% / 6 employees (or 600%) = 25%
When claiming R&D expenses, you can claim 25% of the utilities used if all workers used the same site.
This method is basic and is not recommended if there are large manufacturing utility costs.
Wholly R&D expenses refer to the costs spent on consumables that are used only in the R&D process. For example, if new equipment is needed for the project, or new materials are purchased to develop prototypes, all of these expenses can usually be claimed in full. Concern needs to be given to capitalised items – but often, these are not “consumed” so they would be excluded anyway.
For some R&D projects, new software will need to be purchased in order to further develop the research activities. The good news is that you can claim back for all software you have invested in specifically for your R&D projects. You do have two variations of how much you can claim back.
If the software was only needed and purchased for the R&D project, you can claim back 100% of its price. On the other hand, if the software package is only partly needed for the R&D process whilst also being used outside of R&D, you can still claim back some of the funds. The price will need to be apportioned, based on how much of its use was for R&D purposes.
6.Volunteer Costs for Clinical Trials
As there are various types of R&D needed depending on the company and trade, some businesses can claim back expenses related to its clinical trials. This category tends to only be relevant to pharmaceutical firms that need to test various new treatments etc. Any payments made to volunteers during a company’s clinical trials are eligible for tax relief.
7.Contributions Made For Independent Research
What qualifies as independent research? This term refers to a larger company making payments to other smaller organisations that are carrying out eligible R&D projects. This category of expenses does have some stipulations. As stated by HMRC, the recipient organisation must be conducting research that is relevant to your own field or industry. Additionally, the recipient must also be a ‘qualifying body’, which includes:
Many businesses will need to design and create prototypes in order to run crucial tests for their R&D projects. These prototypes that are specifically created to test the R&D your company is undertaking, are fully eligible for R&D Tax Credits. This refers to all of the costs associated with designing and creating prototypes, including materials and construction.
These expenses can be claimed in full unless you’re planning to sell the prototype. If the prototype will be sold, only some of the costs could be covered. This could include construction and materials costs but it’s not definite, and ultimately, HMRC will decide.
What Are the Ineligible Costs?
Though there are many types of eligible costs for your R&D projects, it’s good to keep in mind what costs do not qualify as eligible R&D activities. Listed below are the costs that are not eligible for relief, provided by HMRC – This is not an exhaustive list.
HMRC does reserve the right to make some exceptions to the above categories of ineligible expenses, so if you’re unsure, it’s worth contacting an R&D Tax Credits expert.
How Can TBAT Innovation Help?
With over 17 years of experience, TBAT Innovation has worked with technology/research and development organisations all over the UK. By helping companies with grant funding, private investment and applying for corporation tax relief, our goal is to aid in progressing a company’s projects from beginning to end.
At TBAT we can help you with your application to the HMRC for your R&D tax credits. By working together with your Accountant, you will have the ease of accruing funds that can be invested in future R&D projects and making further advances in your field.
There are 2 schemes available: a scheme for smaller businesses, the SME Scheme, and a large company scheme, the RDEC Scheme. Companies can claim for the current financial year and the 2 years previous; meaning your first claim could be a huge asset to push forward your R&D activities.
Although, now, pre-notification to HMRC of a claim is required – so talk to TBAT soon to ensure you don’t miss a year’s expenditure.
Within R&D tax credit frameworks, there exist varying degrees of guidance, each with distinct purposes. These are ‘Meaning of Research & Development for Tax Purposes: guidelines’, 'CIRD Manual (Corporate Intangibles Research and Development)' and ‘Guidelines for Compliance’
Read our guide to a successful Innovate UK Grant Application, addressing the key areas and questions, with a few top tips along the way!
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